Good day, ladies and gentlemen, and welcome to your Crescendo Fourth Quarter and Year-end 2019 Earnings Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to Steve Mihaylo, CEO and Chairman of the Board. Sir, the floor is yours.

Thank you, Christie. Good afternoon, everyone. I'm Steve Mihaylo, Chairman and CEO of Crexendo. I want to welcome all of you to the Crexendo year-end 2019 conference call. With me today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; and Jeff Korn, our General Counsel. I'm going to ask Jeff to read the safe harbor statement. After that, I will give some brief general comments relative to the quarter. Ron will then provide more detail on the numbers. Doug will provide a business and sales update, and then we will open the call up to questions. Jeff, would you please provide the safe harbor statement?

Yes. Thank you, Steve. I want to take this opportunity to remind listeners that this call will contain forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. All statements made in this conference call other than statements of historical facts are forward-looking statements. Forward-looking statements include, but are not limited to words such as believe, expect, anticipate, estimate, will and other similar statements of expectation identifying forward-looking statements. Investors should be aware that any forward-looking statements are based on assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the Company's filings with the Securities and Exchange Commission, including the Form 10-K for the fiscal year ended December 31, 2019 and Forms 10-Q as filed. Crexendo does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, further events or otherwise. I'd now like to turn the call back to Steve. Steve?

Thank you, Jeff. This was a very exciting year for Crexendo. Our goal was to be GAAP profitable and we achieved that. Our goal last year was to be non-GAAP profitable and we achieved that. This is not a matter of mission accomplished. These were two steps in what we expect to be a methodical process of substantially growing this business. 2019 was a very good year. We achieved a GAAP profit of $0.08 per basic common share for 2019. This is especially exciting, considering that we had a GAAP loss of $0.02 per basic common share in 2018. We had very strong results in our Cloud Telecommunications segment. UCaaS service revenue for the year increased 25% in 2019 compared to the year ended December 31, 2018. One thing we have always done well is manage our cash. Our cash position has more than doubled with total cash, cash equivalents and restricted cash being $4.3 million at the end of 2019 compared to $1.8 million at the end of 2018. Also very impressive is the increase in our current ratio to 2.0:1, and our shareholder equity increased by 119% in 2019. These results are even more impressive when you take into account that Crexendo marked $200,000 for bonuses in Q4 of 2019. None of this matters if we don't continue to provide and grow the business. Sales are good, but could be better. I'm going to be taking a more active role in the sales process with Doug so we can keep this momentum going. In addition, Doug is going to take a more active role in acquisitions, so we can grow the business even faster. We're going to accelerate our marketing spend as well. We added a dedicated marketing position yesterday that we have been searching for a very…

Yes, sir. Thanks, Steve. Consolidated revenue for the fourth quarter of 2019 increased 20% to $3.7 million compared to $3.1 million for the fourth quarter of the prior year. Service revenue for the fourth quarter increased 20% to $3.3 million compared to $2.8 million reported for the fourth quarter of the prior year. Cloud Telecommunications service revenue for the quarter increased 23% or $599,000 to $3.2 million compared to $2.6 million reported for the fourth quarter of the prior year. Web Services segment service revenue for the quarter decreased 19% or $35,000 to $154,000 compared to $189,000 reported for the fourth quarter of the prior year. Product revenue for the fourth quarter of 2019 increased 20% to $397,000 compared to $330,000 for the fourth quarter of the prior year. Consolidated operating expenses for the fourth quarter of 2019 increased 13% to $3.5 million compared to $3.1 million for the fourth quarter of the prior year. Net income for the fourth quarter of $228,000 or $0.02 per basic common share and $0.01 per diluted common share compared to a net loss of $8,000 or breakeven per basic and diluted common share for the fourth quarter of the prior year. Non-GAAP net income for the fourth quarter of $347,000 or $0.02 per basic and diluted common share as compared to $104,000 or $0.01 per basic and diluted common share for the same period of the prior year. EBITDA for the fourth quarter was $243,000 compared to $26,000 for the same period of the prior year. Adjusted EBITDA for the fourth quarter was $349,000 as compared to $120,000 for the same period of the prior year. Now let's take a look at year-end. We are pleased with our consolidated revenue for the year of $14.4 million. That's an increase of 21% compared to…

Thanks, Ron. We finished 2019 with a strong Q4, and that allowed us to finish 2019 with very positive results. 2019 was a breakout year for Crexendo with strong GAAP income, a healthy increase in our backlog, increased sales bookings and a cash balance which was up 126%. We've had two successive years where we were able to reach different inflection points, and we are very pleased with the results we delivered and are committed to continuing our revenue and income growth in the year ahead. We had strong sales bookings for the quarter from both our direct and partner channels and finished the year with a strong total increase in sales bookings. We continue to add additional partners to our channel and are excited about the new partnerships being formed. Our direct efforts for the year saw a secure and some significant multi-site accounts that were well into the six figures TCV, total contract value. Our existing base of partners continues to have success and has grown more comfortable leaving and positioning with the Crexendo solution. We have launched some nice incentives in Q1, which we anticipate will help continue our growth and momentum in the channel. And our partners are equally excited about building on their success in the year ahead, and we have strong funnels in the channel. Our strong sales bookings for the quarter helped increase our sales backlog, as Ron mentioned, to slightly more than $26 million, which is a 14% increase over December 31, 2018. And our telecom sector gross margin remained strong at 71% in Q4. The fact that we design and manufacture our own telephone instruments along with our core platform, allows for increased margins for us and higher commissions for our partners. Our increased bookings and improved margins over the course…

Thank you, Doug. At this time, Christie, we'd like to open it up to questions.

[Operator Instructions] And our first question comes from Andrew King with Dougherty & Company.

Just wanted to get an idea of what the partner contribution to revenue was for the quarter and then for the full year. And then additionally, if you could comment on the number of partners that you had in the quarter and what type of partnerships those primarily were, that would be great.

Andrew, I'm going to let Doug Gaylor answer that question. Doug?

Yes. Thanks, Andrew. Approximately 70% of our sales came from our partner channel for the year. Our partner channel continues to grow and increase. We added 10 new partners in Q4 approximately 250 partners currently within the Crexendo platform and program. So we continue to enhance that program by adding new partners. And so the 10 additional partners and really kind of three different buckets, so we see managed service providers and data MSPs. We see business-to-business companies. We added quite a few copier companies over the course of the quarter. And then we see a traditional telecom resellers out there that we added a few during the quarter. So that's a pretty even split amongst those categories. So again, managed service providers and data VARs being one bucket. The business-to-business type companies that aren't traditional telecom companies being the second bucket, and then the third bucket being the traditional telecom companies.

And our next question comes from Allen Klee with National Securities.

You started off talking about plans to increase the focus on marketing this year. Could you maybe just expand a little of that, of what's kind of the areas of focus and what you hope to accomplish from that?

Sure, Allen. Here, again, I'm going to turn this over to Doug Gaylor to answer. But the whole idea is that more lead generation and quicker.

Yes. Thanks, Allen. Great question. So as we look at our marketing spend, yes, we were committed on our last conference call that now, that we are in a very profitable position that we're going to start reinvesting more into the business, and that includes sales and marketing. So as I mentioned in my comments, we put some incentives in place for our partner program, but we're also putting some major initiatives into our marketing efforts. We hired a director of marketing that just started this week. So we're excited about her coming on board to the team. We've attended a few individual trade shows already this year that have resulted in great lead generation efforts. We've increased some of our lead generation efforts through SEO and paid search on the web, and we're continuing to explore other investment opportunities for our marketing dollars to increase the visibility of Crexendo, and as Steve said, highlighting lead generation. So the more lead opportunities that we have, our closing ratios are extremely high. And so when we find those opportunities, we stand a very good chance of landing that business. We're also investing in some marketing programs to attract new partners. So as the previous question from Andrew alluded to, we added 10 partners in the quarter. We attended a few conferences already so far this year that are specific for bringing on new partners, and we're seeing very nice results in those efforts.

Okay. And then maybe following up on that. As you're spending more on -- focused on marketing and getting good returns on that, how do you see -- are there any changes in the competitive environment that stand out?

Andrew, I'm going to let Doug answer that one as well. He's a lot more familiar with the sales process at this point. So Doug, can you handle it?

Yes. Absolutely. Allen, so yes, the marketing efforts are really a necessary part of our growth pattern because in our market, we see a tremendous amount of marketing spend from our competitors. Somewhat so, in fact, that most of our competitors haven't reached profitability because they're spending so much on sales and marketing that it's putting them in a loss position. So we're seeing a lot of competitive forces out there with incentives and marketing programs that, again, are kind of a benefit for us because it raises the optics on migration to the cloud. So when I look at all of our competitors out there that are seeing the same hand mill that everything is moving to the cloud, it really helps reinforce that with the end-user customer on the fact that the -- some of it matter, if the customer moves to the cloud, it's when. And eventually, they're all going to be moving to the cloud. So -- and the statistics still show 65% to 70% that hasn't converted over to the cloud. And so those marketing efforts are key. But we see our competitors like RingCentral and 8X8 and Vonage, spending tremendous amounts on their sales and marketing initiatives. We're going to follow suit, but not to the extent that they are to put us into a loss position.

Great. And then could you maybe just discuss the factors behind your improved margins and if you think this can continue?

Well, this is Steve Mihaylo. I think it can continue, but we're just about as far as we can go without getting more critical mass. The margins might expand by 1% or 2% year-over-year. But I think it'll be tough to get higher than about 75% margins. We're at above 70.5% right now. So over the next 3 or 4 years, we might reach 75%. And the reason that's happening is we watch every penny. We're very competitive. A lot of the cost and the margins are for the redundancy that we've built into this system. I don't know if you want to add anything to that?

Yes. One of the things, Allen, as you're well aware, we design and sell our own telephones out there. And so we have lower margins on our hardware. Our service margins actually increased for the quarter in Q4. We had a little bit of a decrease in our hardware margins. So as Steve said, I think that the margins will continue to improve. We're constantly working on our vendors and suppliers to work on our cost structure. And so I think that we've got a very stable margin where it is today, but we will slowly see increases on that as we continue to negotiate better options out there.

And our next question comes from Kevin Dede with H.C. Wainright.

So I'd like to think, I know Steve and Doug both of you well enough to know that you wouldn't have hired a marketing person, unless that person brought some interesting new initiatives with them. And I was just wondering if you might give us a little color on your new hire and some plans that you think you might be able to execute on?

I'm just going to make one comment, and then I'm going to turn it over to Doug, but we've been looking for this person for a long time. And obviously, a marketing person is a key position in the Company. We've done okay without a lot of money being spent on marketing, but we spend a lot more than you might imagine. But this focus is the lead generation under one person. And it causes us to optimize our site, optimize all of the logging that's being done. If you've followed me at all, I blog almost every other day on LinkedIn, and we're starting to get traction there, but we wanted to make sure this is coordinated properly. Doug, do you want to anything to that?

Yes. Absolutely. So Kevin, you're exactly right. I mean we're always looking at investing our money in the correct fashion. And so this person comes on board with a tremendous amount of background, over 10 years in marketing. And so if I look at what our biggest challenges are from Crexendo's perspective, from a marketing perspective. And I highlight this on a lot of our investor presentations, is that we're one of the best kept secrets in the UCaaS market. And being a best kept secret isn't necessarily a good thing. And so we've got a great story to tell. We've got a great brand. We've got a great product offering and support behind that product offering. And so getting that message out there is critical for us. So the marketing efforts that we're going to be focused on right out of the gate is improving our marketing materials to go out there and highlight who Crexendo is out there in the industry. If you do a Google search for top VOIP providers in the marketplace, we don't pop up from paid search or organic search or even on a lot of the noted list out there. And so some of those are paid to play. Some of those are really marketing-oriented. So it's really a matter of getting our message out there in those type forums. From a trade show perspective, I mentioned that earlier with some of our marketing spend. If you do a trade show, you got to have the right message out there. You got to have the right reason for people to stop at your booth. You've got to pick the right shows to attend to make sure that you're getting a good ROI. So that's going to be a key initiative for us in…

All right. So if I was to sum it up, it sounds to me like there's a big emphasis on sort of the digital space and maybe trying to sort of coordinate a brand image that you can share across all the different, I guess, all the different avenues to the market. Is that a fair way to sum it up?

Yes. It's a fair way to sum it up. And one item that I would just -- that I failed to mention is that we now meet all the requirements with our financials at the end of the year to uplist. And so we're going to be starting that process. We've already started that process to uplist to the NASDAQ. And so we're working on that process as we speak. So having marketing materials for those -- the uplist in doing any potential road shows in the future and any marketing materials associated with being on the higher exchange, it's going to be critical for us. And so having somebody to help us with those initiatives will be important.

Okay. So in conjunction, Doug, could you just dig in a little deeper on the sales effort per se? Can you talk to the headcount at the end of last year and where you think it's going to go this year?

Yes. So total headcount for the Company at the end of the year was 55.5 employees. I anticipate that increasing as we look at reinvesting back in the business. So as we look at putting initiatives in place, we've got a new sales person starting today. So that was 55.5 at the end of last year. So we're actually up 1 or 2 headcount from that with the new marketing person. We had a new channel manager starting this week. So we're looking for sales people that can come on and be accretive to our efforts right off the bat. So when I talk about accretive, we've got two types of sales. We've got direct sales and we've got channel managers, our channel managers handle our channel partners. Each channel manager handles anywhere from 20 to 30 channel partners. And their responsibility is to bring on new channel partners and work with and assist the existing channel partners. So we're always looking for new channel partners that one can bring a, hopefully, book of business with them to potential partners that can join the Crexendo ranks. And then on the direct side, we're always looking for good direct sales reps that can come on board and find opportunities for us to sell from a direct perspective. So again, those are typically going to be salespeople that have experience in the industry. And more importantly, have a book of business or at least a prospecting Rolodex, to use an old term, that they can hit on to find opportunities for us to go sell Crexendo services to.

Do you have a target in mind of where you think your headcount might be in sales by the end of the year?

I would anticipate right now, we've budgeted for an additional 3 or 4 people to our sales efforts. But again, it's all ROI. So if we've got the sales people that are coming on and hitting it on all cylinders and then paying for themselves will continue to add to those efforts. So the one thing about salespeople is that they've got to be able to build a pipeline or funnel immediately so that we can see an immediate ROI. So we are very cognizant of the fact that when we bring salespeople on, there's no misleading on what the expectations are. The expectations are to build a pipeline and build a decent funnel of opportunities that will turn into sales. So we monitor that and measure that very, very diligently.

Kevin, there's another thing, too. We're encouraging both our channel and our direct sales people to increase the size of the customer they call on. Currently, we're at about 22 desktops per customer. And we'd like to increase that to 23, 24 or even 30. And just increasing it from 22 to 23 is an increase of 4.5%. So if we increase it to 24, that's over 8%. So you can see that we're going for more productivity gains as well as headcount gains.

Good point, Steve. Okay. My last question and my favorite. Steve, your opening remarks included commentary, if I remember and understand it correctly, that would lead someone to believe that Doug is going to focus more on M&A. I know that you guys were making some good progress there. At least that's what I thought. And I was wondering how that looks now. What the pipeline looks like now. And whether or not you suspect you might be able to take advantage of valuation compression given an election year, pandemic fears, those kinds of things.

Well, first of all, I'll tackle what you said last, and move back up the other direction here. The pandemic, we don't consider that a plus or a minus. We don't have any problems with our supply chain. And frankly, because our product is very well designed to encourage work-at-home workers, if someone wants to work at home so that they don't have any fears of the pandemic, they can do that with our product. Additionally, both Doug and I are taking on more responsibility, not less. I expect him to sell just as much as they always has and to work with our salespeople. One of the things I would like to say and I felt this way for a long time is better training of both our partners and our direct salespeople. And Doug and I are going to be working on that as well as working on the fact that the acquisitions will give us a very nice boost in sales. For instance, if we just acquire a $2 million or $3 million company, that's almost equivalent to our growth of volume last year. If we do that, in conjunction with our organic growth of about 20% or 25% and maybe boost that by a couple of percentage points, we could be in the 40% to 50% range. I'm saying good has to be the operative here because we have very strict requirements. We're not going to just acquire something because it moves. It has to meet our requirements. And I think I've answered just about all of your questions, Kevin.

Well, I was curious on how those factors play into the M&A pipeline and what you see.

Well, first of all, blogging on LinkedIn has brought us quite a few opportunities. There's a couple of larger ones that we're looking at. All in all, we've got more in the hopper now than we've had in the past. So I would expect at least one acquisition. We completed a very small acquisition at the end of last year, and that's going to help our revenue going forward, but it's a process. It's not just throw money at it and expect it to happen. We like to get to know the people we're taking on. We have to make sure that their accounting is solid. There's a lot of different things that have to be solid here. But all of that's going to increase sales.

And next, we'll go to Maj Soueidan with GeoInvesting.

Okay. I think I have one quick question about the -- just the sales and increasing marketing expense. When you bring a new sales rep on, how long does it -- is it usually -- would it be contributing to that organization? When will it start paying off?

Maj, I'm going to turn that one over to Doug. It's a moving target, just so you're aware of it.

Yes. So as I mentioned earlier, Maj, we've got two types of sales reps. We've got direct sales reps, and we've got channel managers. Channel managers can be much quicker to seeing end results because they're obviously going to be inheriting partners that are already selling our products. So for example, the channel manager that's starting right now, she's going to inherit some channel partners that are already in her marketplace. And so those channel partners are already producing. So she will be a great resource to those partners to give them additional help and resources so we should be able to see those sales, hopefully, increase with the partners in her territory just by her presence. For a direct sales rep, we typically look at a 60-day window for them to get trained, get up to speed, get a pipeline to where we can start selling business. And so we hired somebody back in November. And in the first 30 days, had one sale. In December, they had another sale. And in January, they were already hitting and exceeding quota. So a 60-day turn up for a direct rep to fill their pipeline and get opportunities is very common. And that's really the metrics that we look for is how quickly can they fill a pipeline because that pipeline developing is going to turn into sales.

And our next question comes from Edward Gilmore with Little Grapevine.

And congrats on the quarter. Steve, I'm excited to hear that you're blogging, I'm definitely going to be checking that out. I was just curious if you could just share...

Well, make sure. Make sure and follow me [Edward] because if you just request, then I accept your invitation, I'm already at over 30,000 followers, so I can't add any more by accepting it. You have to follow me.

Okay. Will do. I was just curious, what percentage of your sales now come from inbound leads? And do you think that you could grow that?

Yes. Good question, Ed. Very little percentage comes from inbound leads today. So I would say -- I don't have the exact metrics in front of me, but it's going to be in the single digits, less than 5%. So if we look at the sales that we get through inbound leads, whether it be through digital media or through call ins coming into our switchboard, very few. That's because, again, we haven't done a very good job of getting our name out there for our customers would find us through traditional search forms. So that's obviously an effort where we're going to increase our efforts on marketing to hopefully get more of those inbound leads coming in because that's critical for us. Now when you think about lead generation, we're also working with our partners on lead generation for them as well. So those 200-plus partners out there that are selling our services, we want to give them marketing resources to go out to their customer base and their prospects to do marketing to their prospects and their customers as well.

Okay. Great. And I apologize if I missed, but what was gross margin in the cloud segment?

So gross margin on the telecom sector for Q4 was 71%.

Okay. Great. And then just two last quick questions. For the channel manager, how many channel managers do you have in addition to the new hire? And then the last question, just -- I know you put out the 8-K in January for the purchase of the office facility in Tempe, and I was curious if that creates any kind of cost savings as far as monthly expenses.

Yes. Great. So in addition to the new hire that we just hired, we've got five additional channel managers. So that would make six of this -- over six total channel managers currently and the next question was on the building. So the building purchase, that did happen in January. We purchased the building. And so that will cut our operating expenses to the tune of probably approximately $10,000 per month. I'll have Ron expand on that, but it's pretty significant, so probably approximately $120,000 over the course of the year.

Yes. I think, yes, from a rent payment -- of a monthly rent payment of $25,000, down to a mortgage payment of $11,800 approximately, a substantial savings there. And obviously, along with some depreciation and recognizing those leasehold improvements now as additions to our property and equipment over the full life of the asset will provide us some positive results for operations.

Yes. It will increase our cash flow and probably half as much when it comes to earnings. So it's a positive all the way around.

Next, we'll go to Michael Kaufman with MK Investments.

Is there any particularly weak competitor because you said a lot of them are spending too much and not doing very well in terms of P&L where you can have a concerted effort to go after that customer base.

You know, we're still one of the smaller ones. We've been talking about increasing spend in marketing and various other areas of the Company. I think the market is so big in 65% to 70% of band users are -- haven't converted to the cloud yet. So that's going to be our focus for the next year. As far as going after other competitors, we'd like to get a little bit larger before we do that. But eventually, that will be a part of what we do. I'd say, it's probably a couple of years off. Do you want to expand on that, Doug?

Yes. So we see a lot of opportunity in the industry as all of our competitors do. So the increases in revenue, there's not too many people that are lagging in increases in revenue. So everybody is driving higher revenue numbers. The P&L, that's a challenging because a lot of these organizations are spending way too much on their efforts and not doing any profit at the end of the day. But we do see some weakness with some of our competitors. Avaya just recently announced that they're going to have a partnership with RingCentral. To me, that's a sign of weakness because Avaya could have been developing their own platform, and instead gave a hacking license to one of their biggest competitors to go sell cloud services to their customer base. So yes, that sends up a red flag to us that, hey, those Avaya customers are open territory, not just for RingCentral to go after, but for us as well. So you're going to see that probably that most of our competitors is a direct targeted effect to go after those type of customers.

[Operator Instructions] And we'll move next to [Wyatt Carr] with International Advisers.

The question I have is on the timing of the uplisting, and how long do you think that will take?

Yes. We're currently working through the uplisting process, the application process and gathering all the data, submitting that. So after we get all the applications submitted, it'll be out of our hands. And as far as a review, but that typically takes 4 to 5 weeks review process from what I'm told.

And by the way, one of the reasons on the uplisting is now we qualify for it. It's not as if we're uplisting the uplist. We're uplisting because we qualify for it.

Right. The other thing is the trading volume is very low. And I'm just wondering what kind of plans there are to expose both investors and increase trading volume through conferences and things like that.

Well, we've been going to conferences for quite some time now, and the problem has been that we're on the OTCQX. I think once we uplist, that will help out with the ability for folks like you and anybody else that wants to trade in our stock. Did you want to add something to that Doug or Ron?

Yes. As Steve said, we have been doing quite a few conferences, [Wyatt]. So we are getting our name out there. So the OTC recognize us in the OTC Best 50. We were actually #13 on the OTCQX list for 2019. So we realized that we don't have a lot of volume in the stock. And so getting our message out there is critical for us. So we've been telling the story for quite some time now and getting more and more following. We've got more investors on our conference call today than we've ever had. So it's nice to be able to see quick questions with some of the investors on the conference call. So we must be [indiscernible] that we've got a pretty good following.

And congratulations on the year-end.

You bet. Thank you.

Thank you.

And there appear to be no further questions in the queue. So I'll turn it back over to management for any closing remarks.

There are no closing remarks other than the fact that we're working hard, and we're hitting on about 7.5 out of 8 cylinders. There's always room for improvement. And as we find areas to improve, we'll do that. And with that, I wish you all a good evening, and we'll see on the -- or we'll talk to you on the second quarter results. Thank you.

First quarter.

First quarter.

First quarter. Pardon me, I got ahead of myself, didn't I? Thank you, and good evening, everyone.

Thanks, everyone. All right. Bye.

And that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time, and have a great day.